The outlook for AI investments in 2024

With artificial intelligence (AI) garnering significant investor interest and inflows over the last year, fund managers are bracing for the many opportunities and risks stemming from these investments in 2024.

According to Federated Hermes, companies are already embracing AI to boost productivity, such as optimising their supply chain, and integration of the technology will soon become business as usual. 

“We recognise, however, that there is currently considerably more talk than action, and often more optimistic talk where current profitability is challenged. True monetisation from AI has barely begun,” explained Geir Lode, head of global equities at Federated Hermes.

“We anticipate the greatest short-term gains being on the enterprise, rather than consumer side, and we look for credible plans to boost efficiency rather than companies embracing the AI buzzword without identifying how the technology can be implemented.”

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Predicting AI winners over the next decade will be challenging due to the rapid progress in AI innovation and the evolving landscape of AI regulation, Lode observed.

“The uncertainty is further amplified by the remarkable pace at which computational resources continue to expand, fuelling AI’s capabilities and applications. In 2023, the sheer depth and scale of AI’s potential has driven a rally in AI hardware stocks, for example specialist semiconductor and infrastructure providers. The question then becomes when and where will the rally spill over into software stocks.”

He added: “There will be mistakes, there will be pockets of irrational exuberance, and no doubt the market will at some point step away from these names due to fear rather than fundamentals. We foresee 2024 as the year in which we see the first steps towards AI implementation helping to turn the hype into reality.”

Morningstar noted that while the excitement surrounding the potential for AI has boosted those stocks directly tied to AI, some of the more attractive undervalued opportunities are those that are second derivative plays.

These include data centers, as the roll-out of AI technology will require large amounts of data storage and computing power; data management providers that host enterprise data on which AI models run; and even IT consulting companies with technical capabilities in AI services.

“Artificial intelligence is an exciting theme and we expect a lot of market interest in 2024. One effective way to access the AI theme without paying huge valuation premiums is via second derivative plays. 

“These are not the chip makers or those that offer technology interfaces, but rather, those who can effectively embed AI into their workflow and drive new revenue growth opportunities. The principles of good investing still apply,” Morningstar stated. 

Elaborating on its insights for key themes shaping the global financial markets in 2024, T. Rowe Price said: “Equities markets are transitioning from a higher-growth regime supported by low inflation and low-interest rates to a new regime characterised by higher inflation and higher rates. The new regime requires balancing growth and value style factor tilts, investing in durable growth themes, and finding companies with positive catalysts for change. 

“The immense potential of artificial intelligence as ‘the biggest technological innovation since the advent of electricity’ will continue to create opportunities, particularly in digital semiconductor ecosystem. As AI proliferates across sectors, it is important to position portfolios to benefit from this rapidly changing environment.”